Who really owns Britain’s trains?

Two of the three UK train leasing companies, Porterbrook and Eversholt sold generating huge profits

The UK rail market leases the overwhelming majority of its trains (Carriages, locomotives and freight vehicles) from three Rolling Stock Companies (ROSCOs) which were set up in 1994.

These were each ‘given’ roughly a third of British Rail’s traction and rolling stock fleet. The sale of these three companies netted the Government over a billion pounds but opponents claimed that in fact this part of the railway selloff actually cost taxpayers several billions of pounds. Several senior managers in the newly privatised ROSCOs made literally tens of millions of pounds when they sold the companies on a few years later.

With hindsight, the opponents were right as subsequent sales of these companies has amply demonstrated. In recent months, two of these companies have changed hands.

Porterbrook

On May 2nd 2014, the owners of ROSCO Porterbrook Rail Finance Limited (PRFL) indicated to shareholders that it was considering its future options which included a complete sale. This has now gone through and the new owners are a consortium spanning the world made up of Alberta Investment Management Corporation, Allianz Capital Partners who have links to insurance companies of the same name, and Hastings Funds Management.

Porterbrook has a wide variety of passenger and freight rolling stock numbering nearly 6000 vehicles including about a third of the UK’s passenger rolling stock fleet.

They said:

Paul Francis, the Managing Director of Porterbrook, said, “We are delighted to welcome AIMCo, ACP, EDF Invest and Hastings as new investors to our business. Their long term approach and capital resources will position Porterbrook well to lead the next phase of growth in the rail industry.”

The Consortium said, “We are excited about the opportunity to invest in Porterbrook. We understand the importance of rail infrastructure to the UK economy and we look forward to developing long-term relationships with each of the Company's many stakeholders.”

Latest contracts

Their latest couple of contracts has seen Class 456 trains leased to South West Trains benefiting from a £10m refurbishment while their Class 455 fleet of 24 two-car units are being upgraded internally. The Class 456 will be similar to the Class 455 when the project is complete and will conform to the Passengers of Reduced Mobility Technical Specification for Interoperability (PRM TSI) legislation for operation beyond 2020.

The units will also be fitted with a new Passenger Information System, new LED lighting and a forward facing CCTV camera to record images of the track and line side area. An innovative automatic passenger counting system will also be fitted to eight of the units to determine the number of passengers boarding and alighting at each station.

This work is being carried out by Knorr Bremse Rail Services at Wolverton railway works and the contract was scheduled for completion by end of April 2015 but may take a little longer to complete.

The other recent contract now bearing visible results is the financing of new trains for Southern for the new Class 387/1 electric trains for use on Thameslink routes. This is a £172million for 116 vehicles contract.

Eversholt

Just after the Porterbrook sale was completed, the intended sale of Eversholt Rail Group to CK Investments S.A R.L was announced in January 2015

Eversholt Investment Group S.C.S. were the consortium of sellers made up of 3i Infrastructure plc, Morgan Stanley Infrastructure Partners and STAR Capital Partners. They have sold Eversholt Rail Group (Eversholt Rail) to CK Investments S.A R.L., a company jointly owned by Cheung Kong Infrastructure Holdings Limited and Cheung Kong (Holdings) Limited, (together, "CKI”).

Do the train numbers add up?

They had owned the company since December 2010 when they purchased it from HSBC bank in those troubled banking times and is reported that the sale generated large profits for the investment partners, called by some, a Gravy Train! HSBC paid £725million for the company in 1997.

They will control about 28% of passenger trains in the UK and the reported sale price was £2.5 billion pounds. Have they paid too much? Who knows but what is certain is that the ever growing demand for rail travel will keep every usable carriage in service. And by refurbishing the British Rail built carriages for another 10 to 20 years at about a third of the cost of a new train, they will generate long term profits.

The European Commission under the EU Merger Regulation has to approve the deal and this is expected in the next few weeks.

They said:

Mary Kenny, Chief Executive Officer of Eversholt Rail, said: "Eversholt Rail has performed strongly, both operationally and financially, under its current ownership providing, managing and maintaining key UK rail assets. We look forward to continuing our success with CKI, who have extensive experience in managing infrastructure assets and are highly supportive of our strategy and approach.”

The Eversholt Rail Group has invested over £2billion over the last 20 years and leases trains to 11 passenger operators and is in the freight locomotive leasing market. 3i Infrastructure said the sale would generate £358million which represented an ‘exceptional return’ for its shareholders.

Government jealousy?

The Department for Transport (DfT) has long suspected that the ROSCO market has been rigged between the three companies but investigations did not support this view. So the DfT then procured their own trains such as the Thameslink Class 700 fleet and the Hitachi Class 800 Intercity Express Train fleet to much criticism.

This was driven by scope changes and the difficulty in getting finance agreements in place. The ROSCOs have good cash-flow and a huge commercial asset base making investment possible away from political whims.

Government dogma?

A couple of years ago, Eversholt proposed a mixture of new locomotives and carriages for the East Coast Main Line, a far cheaper option that the DfT’s Class 800 project. Eversholt could not convince the DfT that they had the right solution so the more expensive Hitachi option was followed.

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